Preqin Special Report: CTAs

Transcription

1 Content Includes: Preqin Special Report: CTAs Investors in CTAs June 2016 More institutional investors currently invest in CTAs than ever before. Recent growth in investor numbers has been matched by significant inflows of capital to CTAs. Fund Launches Despite a growing appetite for the strategy, the number of new fund launches has fallen significantly since Performance After a difficult 2015, CTAs started 2016 strongly. alternative assets. intelligent data.

2 Preqin Special Report: CTAs Download the data pack: Foreword Commodity Trading Advisors (CTAs), which operate trading strategies in futures and related derivatives across a wide range of commodity and other fi nancial markets, have attracted considerable interest from investors in recent quarters. Net infl ows to CTAs amounted to $24.6bn in 2015, the third highest among top-level hedge fund strategies, and despite the hedge fund industry as a whole experiencing outfl ows of $14.3bn in 2016, infl ows to CTAs continued ($13.7bn). Although CTAs experienced some performance diffi culties in 2015, with the Preqin All- CTA benchmark falling 0.08%, they started 2016 strongly, returning 1.5 in Possibly more importantly from an investor s perspective, however, is CTAs continued low correlation to other fi nancial markets, with investors utilizing the strategy to add diversifi cation to their overall portfolio. The correlation of CTAs to the Preqin All- Hedge Fund benchmark and the S&P 500 Total Return Index have both fallen to close to zero, while their correlation to the S&P GSCI Total Return Index, which tracks liquid futures contracts in diversifi ed commodities, has turned negative, as CTAs benefi t from their ability to take short positions during the decline in commodity prices over the past two years. With more investors allocating greater sums of capital to CTAs, this report takes a look at the latest trends in the CTA market: investor allocations and future activity, the make-up of the current fund market and CTAs long-term and recent performance. We hope you fi nd this report useful and welcome any feedback you may have. For more information, please visit or contact info@preqin.com. Key Facts $13.7bn 1,191 Total inflows to CTAs in 2016, the largest among all hedge fund strategies. Number of CTA funds active in the hedge fund industry today. 6 Proportion of CTAs that employ a trend following strategy. 1.5 Preqin All- CTA benchmark return in Contents Investors in CTAs 3 Fund Managers 5 Performance of CTAs 6 All rights reserved. The entire contents of Preqin Special Report: CTAs, June 2016 are the Copyright of Preqin Ltd. No part of this publication or any information contained in it may be copied, transmitted by any electronic means, or stored in any electronic or other data storage medium, or printed or published in any document, report or publication, without the express prior written approval of Preqin Ltd. The information presented in Preqin Special Report: CTAs, June 2016 is for information purposes only and does not constitute and should not be construed as a solicitation or other offer, or recommendation to acquire or dispose of any investment or to engage in any other transaction, or as advice of any nature whatsoever. If the reader seeks advice rather than information then he should seek an independent financial advisor and hereby agrees that he will not hold Preqin Ltd. responsible in law or equity for any decisions of whatever nature the reader makes or refrains from making following its use of Preqin Special Report: CTAs, June While reasonable efforts have been made to obtain information from sources that are believed to be accurate, and to confirm the accuracy of such information wherever possible, Preqin Ltd. does not make any representation or warranty that the information or opinions contained in Preqin Special Report: CTAs, June 2016 are accurate, reliable, up-to-date or complete. Although every reasonable effort has been made to ensure the accuracy of this publication Preqin Ltd. does not accept any responsibility for any errors or omissions within Preqin Special Report: CTAs, June 2016 or for any expense or other loss alleged to have arisen in any way with a reader s use of this publication Preqin Ltd. /

3 Download the data pack: Preqin Special Report: CTAs Investors in CTAs CTAs play an important role in a number of institutional investors portfolios. These vehicles, operating trading strategies in futures and other related derivatives across a range of commodity and other fi nancial markets, offer the possibility of returns with low correlation to other fi nancial markets, and can help to diversify and smooth returns in investor portfolios. These benefi ts have attracted a number of institutional investors to allocate to CTAs in recent years, with the number of active investors rising from 331 in 2008 to 1,067 as of the end of 2015 (Fig. 1). While CTAs are most established among fund of hedge funds managers, 43% of which invest in CTAs, a range of other large institutions include CTAs in their portfolios: 28% of public pension funds and 27% of superannuation schemes allocate capital to CTAs (Fig. 2). Europe-based hedge fund investors are more likely to invest in CTAs than investors from other regions, with 27% allocating to the strategy, followed by 2 of Asia-Pacifi c-based investors (Fig. 3). By contrast, only 19% of all hedge fund investors based in North America and 1 of investors based outside these regions invest in CTAs. Fig. 1: Number of Institutional Investors Active in CTAs, No. of Investors 1,200 1, Recent growth in investor numbers has been matched by signifi cant infl ows of capital to CTAs in recent quarters; CTAs received net infl ows of $24.6bn in 2015, the third highest among top-level hedge fund strategies (Fig. 4). This growth continued in 2016, when CTAs received infl ows of $13.7bn despite the hedge fund industry as a whole experiencing net outfl ows of $14.3bn. The infl ow of capital has contributed to the signifi cant increase in CTA assets ,017 1, under management (AUM), which rose from $204bn at the beginning of 2015 to $241bn by 2016, representing the largest percentage increase (18%) among top-level strategies in this period. However, the new capital has not accrued evenly to all CTAs as investors appear to be allocating larger sums of capital to some vehicles while withdrawing capital from others. Despite the signifi cant infl ows to CTAs in 2016, only 4 of CTAs saw infl ows in this period, while 48% saw outfl ows. Fig. 2: Proportion of Institutional Investors in Hedge Funds with a Preference for CTAs by Investor Type Fig. 3: Proportion of Institutional Investors in Hedge Funds with a Preference for CTAs by Investor Location Proportion of Investors % 3 28% 27% % 17% 17% 1 13% 1 Fund of Hedge Funds Manager Sovereign Wealth Fund Public Pension Fund Superannuation Scheme Asset Manager Insurance Company Bank/Investment Bank Private Sector Pension Fund Wealth Manager Endowment Plan Foundation Family Office Other Proportion of Investors % 2 19% 1 Europe Asia-Pacific North America Rest of World Investor Type Investor Location 2016 Preqin Ltd. / 3

4 Preqin Special Report: CTAs Download the data pack: Appetite and Future Activity Despite a challenging 2015 for CTAs, in which the Preqin All- CTA benchmark returned -0.08%, investors remained satisfi ed with performance: 69% of investors surveyed for the Preqin Investor Outlook: Alternative Assets, H1 2016, felt that their CTA investments had met their expectations for the year, the second largest proportion among top-level hedge fund strategies (Fig. 5). This highlights the role of CTAs in diversifying portfolios and providing some downside protection. In this context, fl at performance during a time of volatile commodity prices and falling equity markets may be acceptable for these investors. Investors will continue to seek new investments in CTAs in the year ahead; 29% of investors surveyed by Preqin plan to increase their exposure to CTAs in 2016, including that did not invest in 2015 but plan to in 2016 (Fig. 6). While there remains a signifi cant proportion (4) that do not yet invest in CTAs and do not intend to over the course of 2016, among investors that currently allocate to CTAs, over half plan to increase their allocations. Fig. 4: Quarterly by Strategy, AUM Percentage Change in AUM over 2016* CTAs % Credit % Equity Event Driven Macro Multi-Strategy % Niche Relative Value % Total Industry , Fig. 5: Hedge Fund Portfolio Performance in 2015 Relative to Expectations of Institutional Investors by Strategy Fig. 6: Investors Allocation Plans for CTAs in 2016 Proportion of Respondents % 2 Relative Value 69% 68% 6 63% 31% % CTAs Multi-Strategy Equity Funds of Hedge Funds 47% % 5 58% Credit Event Driven Macro 9% 91% Emerging Markets Met Expectations Fell Short of Expectations % Did Not Invest in 2015 but Will in 2016 Plan to Increase Exposure Plan to Maintain Exposure Plan to Decrease Exposure Did Not Invest in 2015 and Will Not in 2016 Strategy Source: Preqin Investor Outlook: Alternative Assets, H Source: Preqin Investor Outlook: Alternative Assets, H Fig. 7: Sample Investors Targeting CTAs in the Next 12 Months Investor Type Location Investment Plans for Next 12 Months APK Pension Fund Sacramento County Employees' Retirement System Private Sector Pension Fund Public Pension Fund Austria Swaen Capital Asset Manager Singapore US Plans to invest 30mn across two funds in the next 12 months, seeking exposure to CTAs alongside macro and equity market neutral strategies. Expects to commit to two funds in the next 12 months focusing on systematic CTA and low volatility strategies. Swaen Capital is looking to invest in CTAs in the next 12 months. The asset manager is not interested in seeding funds or investing in emerging managers but may consider spin-off teams. *Includes increase in assets due to performance Preqin Ltd. /

5 Download the data pack: Preqin Special Report: CTAs Fund Managers There are currently 1,191 CTA funds active in the hedge fund industry today. Data taken from Preqin s Hedge Fund Online service shows that the number of new CTA launches reached a peak in 2012 and 2013, before falling over the past few years as the market became more saturated with these vehicles (Fig. 8). Although the number of CTA launches in 2016 will increase substantially over the rest of the year, the small proportion () of all fund launches so far in 2016 that CTAs accounted for suggests that this could be another year of comparatively few launches, despite the growing appetite for these funds in the current market environment. The majority of CTAs trade using systematic models, which use computer algorithms to predict patterns in futures markets. The proportion of new fund launches that solely use a systematic methodology has fl uctuated between 7 and 77% since 2010 (Fig. 9). Eleven percent of new vehicles launched in 2015 combine computer-driven trades with discretionary trading by fund managers, while the proportion of new vehicles that relied solely on discretionary trading stood at 19%, the highest level since The majority (6) of CTAs utilize trend following strategies, which seek to capture directional moves in market prices through the use of technical indicators (Fig. 10). Comparatively, the next most commonly used strategies are macro (2), counter trend (23%) and pattern recognition (23%), while only 13% use arbitrage and 1 practice option writing strategies. Currency markets are the most frequently traded futures markets by CTAs (6 of vehicles), while large proportions also trade stock indices (58%), energy (5), grains (5) and metals (51%, Fig. 11). Fig. 8: CTA Launches as a Proportion of All Hedge Fund Launches by Year of Inception, YTD (As at 19 May 2016) Fig. 9: Trading Methodology Employed by CTAs by Year of Inception, YTD (As at 19 May 2016) No. of CTA Launches YTD Year of Inception % Proportion of All Fund Launches Proportion of CTAs % 7% 1 11% 1 11% 13% % 17% % 1 19% 13% % 71% 77% 77% % YTD Both Discretionary and Systematic Discretionary Systematic No. of CTA Launches Proportion of All Fund Launches Year of Inception Fig. 10: CTAs by Strategy Employed Fig. 11: Top Futures Markets Traded by CTA Funds Proportion of CTAs % 23% 13% 1 Proportion of CTAs % % 41% Trend Following Macro Counter Trend Pattern Recognition Arbitrage Option Writing Currencies Stock Indices Energy Grains Metals Interest Rates Bonds Softs Meats Strategy Futures Market 2016 Preqin Ltd. / 5

6 Preqin Special Report: CTAs Download the data pack: Performance of CTAs After a diffi cult 2015, which saw CTAs return -0.08% for the year, CTAs began 2016 with strong performance. Intramonth price swings and the volatility of commonly traded commodity assets created diffi cult conditions for fund managers in 2015, and 2016 has started in a similar style. Oil prices hit a 12- year low at the beginning of February, yet positive talks between Saudi Arabia and Russia later in the month drove prices to a seven-week high. Oil prices continued to increase in March, with the WTI Index hitting prices 5 higher than the lows seen in February, while there were also increases in the prices of sugar and coffee. CTAs performed well in these volatile markets, with the Preqin All- CTA benchmark returning 1.5 in the fi rst three months of the year despite losses of 1.1 in March (Fig. 12). CTA Performance Fig. 13 highlights the diversifi cation benefi ts that CTAs can provide over the long term. Since the beginning of 2011, hedge funds have posted fi ve negative quarterly returns; in four out of these quarters, CTAs returned positive gains to investors, with the most drastic difference in performance coming in 2011, when CTAs generated 2.5 compared with -6.1 for hedge funds. However, over the longer term, hedge funds outperformed CTAs over both the threeand fi ve-year periods (Fig. 12). While Fig. 12: Performance of CTAs (As at April 2016) Net Return 8% 2.49% 2.83% % 1.88% 1.18% % 0.13% % -0.69% % -0.77% % the strong performance of CTAs in 2014 has driven their two-year performance signifi cantly higher than that of hedge funds, CTAs ended 2015 with a negative return for the year, with most CTA substrategies delivering a return of less than 1.0. Strategy Performance Since the beginning of 2015, option writing strategies have had the strongest performance among CTA sub-strategies (Fig. 14), returning 8.67% over this period, nearly three percentage points more than any other CTA sub-strategy. This was helped by the strong performance of the 6.93% % 3.41% 3.39% 1.5 sub-strategy in 2015, when option writing returned 8.5, compared with the 1.2 returned by macro strategies, the next strongest performing sub-strategy. Counter trend is the next strongest performing sub-strategy over the period since January 2015, followed by macro and pattern recognition. As seen on page 5, nearly two-thirds of all CTAs employ trend following strategies; however, despite this large proportion the substrategy has returned 1.28% since January 2015, the worst performance of all CTA sub-strategies. Fig. 13: Quarterly Performance of CTAs vs. Hedge Funds, CTAs Hedge Funds S&P 500 Price Return Year Annualized 3-Year Annualized 5-Year Annualized Hedge Funds Discretionary CTAs Systematic CTAs All CTAs Net Return Preqin Ltd. /

7 Download the data pack: Preqin Special Report: CTAs Risk/Return Profiles Over the three-year period to April 2016, arbitrage strategies have generated the highest annualized returns with the lowest volatility (Fig. 15). Macro, pattern recognition and counter trend strategies are closely clustered in terms of their risk/ return profi le. In contrast to arbitrage, option writing strategies exhibited the lowest returns and highest volatility over the three-year period, with the recent strong performance not enough to offset losses in previous years. Market Correlation Since the decline in commodity prices in H2 2014, correlation between CTAs and the S&P GSCI Total Return Index has become increasingly negative, reaching in April 2016, highlighting the ability of these vehicles to take advantage of both upward and downward moves in commodity futures (Fig. 16). CTAs have retained a low correlation (less than 0.3) to both equity markets and other hedge fund strategies since January 2013; although correlation increased in the second half of 2015, by the end of April CTAs had close to zero threeyear correlation with equity markets and hedge fund strategies. Systematic vs. Discretionary Systematic CTAs signifi cantly outperformed their discretionary counterparts in the fi rst quarter of 2015; however, since then, systematically traded CTAs have recorded fl uctuating performance with losses in April (-1.7), August (-2.03%) and December 2015 (-1.57%) to end April 2016 with a return just eight basis points higher than discretionary CTAs at 1.38% (Fig. 17). In the middle of 2015 the difference in volatility levels between these two trading styles widened; despite the volatility metric in Fig. 16 created using returns over a three-year period, the sharp dip in the performance of systematic CTAs in 2015 will have been a factor in this change of trend. The basis point spread in volatility was 108 as of May, which widened to 176 basis points in August and remained around that level up to April 2016 (169). Outlook So far in 2016, CTAs have recorded strong performance and reduced their correlation to the equity markets, emphasizing the use of CTAs in creating a well-balanced portfolio by not only providing diversifi cation to traditional assets but also the potential for good levels of returns. Even within CTAs there is noticeable variation between strategies, and although many vehicles are trend following, a diversifi ed approach to CTAs may help smooth returns. Fig. 14: Cumulative Performance of Top-Level CTA Fig. 15: Risk/Return Profile of Top-Level CTA 1 Net Return 1 8% - - Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 Arbitrage Macro Pattern Recognition Counter Trend Option Writing Trend Following 8.67% % % 1.28% Three-Year Annualized Return 3% 1% Arbitrage Pattern Recognition Macro Counter Trend Trend Following Option Writing 3% 7% 8% Three-Year Volatility Fig. 16: Rolling Correlation of Benchmarks to CTAs, January April 2016 Fig. 17: Cumulative Performance and Rolling Three-Year Volatility: Discretionary vs. Systematic CTAs Three-Year Correlation % 3% 1% -1% - Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar % 1.3 Apr-16 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 All Hedge Funds S&P 500 Price Return S&P GSCI Total Return Systematic CTAs - Three-Year Volatility Discretionary CTAs - Three-Year Volatility Systematic CTAs - Return Discretionary CTAs - Return 2016 Preqin Ltd. / 7

8 Preqin Special Report: CTAs June 2016 Preqin: Global Data and Intelligence If you want any further information, or would like a demo of our products, please contact us: With global coverage and detailed information on all aspects of the hedge fund asset class, Preqin s industry-leading Hedge Fund Online service keeps you up-to-date on all the latest developments across the hedge fund universe. Source new investors for funds Find the most relevant investors, with access to detailed profiles for over 5,000 institutional investors actively investing in hedge funds, including insurance companies, pension funds, family offices, foundations, wealth managers, endowment plans, banks, fund of hedge funds managers and more. Identify potential investment opportunities View in-depth profiles for hedge funds seeking capital, including information on investment strategy, geographic focus, structure, service providers used, sample investors, direct contact information and more. Find active fund managers of hedge funds Search for firms operating hedge funds. View information on key contacts, assets under management, performance history, key investment preferences, known investors and more. Benchmark performance Identify which fund managers have the best track records with fully customizable performance benchmarks, and view performance details on individual named funds and share classes. Examine fund terms and conditions Access fund-by-fund and industry level fund terms and conditions data for individual hedge funds, which provide a market overview, enabling you to see the current trends for specific strategies, structures, sizes and more. View detailed profiles of service providers Search for active administrators, custodians, prime brokers, auditors and law firms by type and location of funds and managers serviced. Customize league tables of service providers by type, location of headquarters, and total known number of funds serviced. For more information on how Preqin s hedge fund online services can help you, please visit: New York: One Grand Central Place 60 E 42nd Street Suite 630, New York NY Tel: Fax: London: 3rd Floor Vintners Place 68 Upper Thames Street London EC4V 3BJ Tel: +44 (0) Fax: +44 (0) Singapore: One Finlayson Green, #11-02 Singapore Tel: Fax: San Francisco: One Embarcadero Center Suite 2850 San Francisco CA Tel: Fax: Hong Kong: Level 9, Central Building 1-3 Pedder Street Central, Hong Kong Tel: Fax: Manila: Pascor Drive Sto. Niño Parañaque City Metro Manila 1700 Philippines info@preqin.com Web: Preqin Ltd. /